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Note 3 – Revenues

Disaggregation of Third-Party Revenues

Lonza derives revenue in its business models of Contract Development and Manufacturing (primarily in the Pharma & Biotech segment) and sale of products (primarily in the Specialty Ingredients segment). These business models and the markets Lonza operates in are the basis for disaggregating revenue into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

The Pharma & Biotech business derives its revenues primarily from long-term supply agreements with pharmaceutical customers. This segment typically provides a range of product and manufacturing services, over the whole range from research to commercial supply. Lonza supports customer’s research activities as well as the whole life cycle of a customer product from development of a drug substance to commercial supply. Lonza concluded that the revenues of the Pharma & Biotech segment shall not be further disaggregated.

The Specialty Ingredients segment focuses on product sales in the area of health, well-being, beauty, nutrition and materials protection. Within this segment, there is a very clear separation between divisions, due mostly to the fact that they serve different types of customers and sales channels, and the products are exposed to different economic and market factors:

The Consumer Health business includes nutrition and dietary supplement ingredients and delivery systems, hygiene and preservation products, and personal-care offerings. The revenues from these types of products are not cyclical in nature.

The Consumer & Resources Protection business provides specialty solutions for the protection, enhanced performance and modification of the end-use characteristics of various materials, including carbon fibers, fabrics, leather, metals, plastics, stone and wood, as well as products and custom agricultural manufacturing services designed to improve crop yields and food quality. The revenues from these products are exposed to the cyclicality of the customer’s markets.

The table below shows the segment information provided to the Group’s Executive Committee and also illustrates the disaggregation of recognized revenues for 2018 and 2017:

Contract Assets and Liabilities

In adopting IFRS 15, the Group recognized contract assets mainly consisting of contract fulfillment costs that are incurred after a contract is obtained but before goods or services have been delivered to the customer. These costs arise from long-term contracts in the custom manufacturing business for customer-specific production facility expansions or modifications on Lonza’s premises. They typically include costs for commissioning, qualification and startup, as well as for activities relating to process development and technology transfer. The assets are amortized on a straight-line basis over the term of the specific contract they relate to, consistent with the pattern of recognition of the associated revenue. Additionally, if services rendered by Lonza exceed the payment received, a contract asset is recognized.

Contract liabilities mainly consist of upfront and other one-time payments, typically resulting from long-term contracts in the custom manufacturing business. These payments make up part of the expected transaction price and are deferred until batches are released. Additionally, if the payments received exceed services rendered, a contract liability is recognized. The non-current portion of deferred revenue is included in other long-term liabilities in the consolidated balance sheet.

The Group has recognized the following revenue-related contract assets and liabilities: